Tax Tips & Calculators

Itemizing Deductions

Higher standard deductions — $5,700 for Single and Married Filing Separately, $8,350 for Head of Household, and $11,400 for Married Filing Jointly and Qualifying Widow(er) statuses — mean that fewer taxpayers benefit from itemizing deductions. (The Standard Deductions are even higher for taxpayers age 65 or older and those who are legally blind.) Itemizing generally pays off only if your qualifying expenses total more than the standard deduction for your filing status.

Plus, for 2009, non-itemizers can increase their Standard Deduction by up to $500 ($1,000 if Married Filing Jointly) of real property tax (other than foreign real property tax) paid by a net casualty loss from a federally declared disaster and by sales or excise taxes paid on a new vehicle purchased after
Feb. 16, 2009. Limits apply to this deduction if the cost of the vehicle is more than $49,500 or if your adjusted gross income is equal to or more than $135,000 ($260,000 if Married Filing Jointly). Complete Schedule L (Form 1040) to claim these amounts.

Bunching

When deciding whether or not to itemize deductions, your year-end strategy should focus on bunching, the practice of timing expenses to produce "lean" and "fat" years. In 1 year, you would try to amass as many deductible expenses as possible. For example, you can time your fourth-quarter state estimated tax payment and certain medical procedures to ensure the expenses are paid when they will result in the greatest tax benefit. The goal is to surpass the standard deduction amount and claim a larger deduction.

In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the "lean" years, year-end plans stress pushing as many deductible expenses as possible into the following "fat" year when they'll have some value.

Accelerating Deductions

Accelerating deductions is 1 method of trimming taxable income — and your tax bill — for the current year. Some examples:

• You can make your last state or local estimated tax payment in December rather than the following January.
• If your current-year medical expenses are close to or exceed 7.5% of your adjusted gross income (AGI), but are usually below the 7.5% threshold, try to schedule next year's expenses for this year. For example, purchase glasses and prescription drugs or schedule a physical in December.
• If you're allowed to pay your real estate tax in 2 installments — for example, December and June — consider paying the full year's tax in December.

Note: Some of the expenses you can normally deduct (for example, expenses subject to the 2% of AGI floor and taxes) are not deductible if you're subject to the Alternative Minimum Tax (AMT). Accelerating those expenses may not result in tax savings. If you're subject to the AMT and have a state tax refund, consider claiming the deduction for sales tax even if it is lower than your deduction for state income tax. The reason is that if you claim the deduction for sales tax, your income tax refund won't be taxable next year. Be sure to prepare the return both ways.